Market resilience faces a test as redemptions rise—will investors hold the line?

With small-cap stocks in bear territory, midcaps on shaky ground, and the benchmark indices losing steam, cracks in investor confidence are beginning to show. And while mutual fund redemptions haven’t hit crisis levels, rising withdrawals are raising uncomfortable questions: Is this just another routine correction, or are we at the tipping point of something bigger?

By the numbers

In January 2025, mutual fund redemptions hit ₹10.3 trillion, lower than December’s ₹13.2 trillion but still above October and November levels, according to Fisdom, a wealthtech startup.

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However, a closer look at net flows suggests that money isn’t necessarily fleeing the market. Barring December, when outflows reached ₹803.5 billion, net inflows remained positive in the other three months— ₹2.4 trillion in October, ₹602.9 billion in November, and ₹1.87 trillion in January.

New investments have also kept flowing, aided by fresh fund launches. While this suggests continued investor interest, the key concern is whether redemptions could accelerate if markets remain weak.

Normal correction or the start of something bigger?

The Nifty Smallcap 250 has plunged 22.5% from its peak, officially entering bear market territory. The Nifty Midcap 100 trails by 18%, and even the blue-chip Nifty 50 has slid 14% from its high. Meanwhile, the Nifty Next 50 has quietly slipped 24%, largely overlooked amid the broader sell-off.

Redemptions have spiked before, particularly during times of market stress. In March 2020, at the onset of the pandemic, mutual fund redemptions soared to ₹15.2 trillion. Since then, redemptions have periodically climbed, notably in March 2022 ( ₹10.5 trillion), March 2023 ( ₹10.3 trillion), and multiple times in 2024—hitting ₹12 trillion in March, ₹11 trillion in June (coinciding with the country’s general election), ₹10.4 trillion in July, and a fresh high of ₹13.2 trillion in December.

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While these figures indicate that redemptions tend to rise in volatile periods, they also show that the recent numbers are not unprecedented. The bigger question is whether investor behaviour has changed enough to prevent a full-fledged redemption cycle.

A portfolio manager, who prefers to remain anonymous and is holding about 90% in cash, believes the market could experience a free fall once redemptions gain momentum. He argues that a bear market has already begun and could last for another year.

Not everyone agrees.

Alok Agarwal, head of quant & fund manager at Alchemy Capital Management, points out that investors haven’t experienced a prolonged correction in the past four to five years. The last deep slump was during the pandemic, but the market bounced back quickly. This correction, however, has been gradual over six months. A sudden, sharp fall, he warns, could still trigger panic-driven selling.

Each correction has played out differently—whether it was the Harshad Mehta scam in the early 1990s, the Asian currency crisis in the late 1990s, the dot-com bubble in the early 2000s, the 2008 financial crisis, or the prolonged time correction from 2010 to 2014, Agarwal noted.

Still, he remains optimistic about long-term resilience. “Bear markets in India usually don’t last long, primarily because our economy grows at 11%+ in nominal GDP terms. Even a year of no price movement translates to an 11% time correction in valuations,” he explained.

Adding to the uncertainty, corporate earnings have also shown signs of strain, with several companies missing expectations in the latest quarter. While not yet a cause for panic, sustained earnings weakness could further weigh on sentiment.

Another growing concern is the lacklustre performance of benchmark indices. With one-year returns hovering around break-even, investor confidence is being tested. If equities turn negative, many may start questioning whether they would have been better off parking their money in fixed deposits, which currently offer ~7% annual returns—without the volatility.

Over the past year, the Nifty 50 has gained a mere 1.5%, while the Sensex is up just 2%—a stark contrast to the double-digit returns many investors have come to expect.

Jittery retail investors

A key stabilizing force for the market has been systematic investment plans (SIPs), which allow retail investors to invest in mutual funds at regular intervals, reducing the impact of volatility. But the latest data suggests that confidence is wavering.

In January, mutual fund investors rushed to stop their SIP payments at an alarming rate. The SIP stoppage ratio—discontinued or expired SIP accounts as a percentage of new SIP registrations—spiked to 109%, the highest since it hit 52% in April 2024, according to JM Financial Institutional Securities.

Read this | Mutual fund industry unfazed as rattled investors rush to pause investments

The number of outstanding SIP accounts fell slightly from 103.2 million in December to 102.7 million in January—a modest decline of 0.5%. But the fact that more accounts were discontinued than registered for the first time in months suggests that recent market corrections have rattled retail investors.

Still, Neelesh Surana, CIO of Mirae Asset Investment Managers (India), believes retail investors won’t rush for the exits unless SIP returns turn negative over a two- to three-year period. “We believe the maturity of the ecosystem has improved, and retail investors are unlikely to redeem unless 2–3 year SIP returns turn negative,” he said.

Even so, Anirudh Garg, partner and fund manager at Invasset PMS, argues that only weak hands will exit the market. He maintains that investors today view mutual funds as long-term allocations rather than short-term trades. In fact, he moved to 100% cash in early October but gradually deployed capital back into the market between late January and mid-February, signalling confidence in a rebound.

Will redemption pressure mount?

Despite rising redemptions, there’s no consensus on whether they pose a major threat to the market.

Vipul Bhowar, Senior Director of Listed Investments at Waterfield Advisors, believes that while investors may hit pause, full-fledged redemptions remain unlikely—unless the downturn extends for two years or an alternative asset class delivers outsized gains.

Some market watchers argue that redemptions will remain in check unless global markets take a sharp turn lower.

While Foreign Institutional Investors (FIIs) have been net sellers, offloading ₹1.09 trillion in 2025 so far, Domestic Institutional Investors (DIIs) have stepped in with net purchases of ₹1.37 trillion, according to NSDL data.

Read this | FIIs pulling out of India is not a surprise. But where is their money going?

Vaibhav Porwal, co-founder, Dezerv, said, “We don’t see any significant redemption pressure from DIIs at this point.”

Historical data consistently shows that domestic institutional investors tend to maintain their positions during market volatility. Even during an exceptionally challenging year like 2020, when pandemic-driven uncertainty shook markets, total redemptions remained insignificant compared to total assets under management.

Looking ahead, Porwal believes that even if market volatility persists in the near term, a free fall is unlikely, as broader economic fundamentals remain sound.

Meanwhile, Rajat Sharma, founder and CEO of Sana Securities, argues that investor behaviour has evolved. He believes the reason panic hasn’t set in this time around is because of rising financial literacy among investors.

“Unlike earlier times when most investments were routed through banks, many of today’s investors have dedicated advisors guiding their decisions, leading to a more informed and measured approach,” he said.

Still, he warns that if the market remains subdued for too long, sentiment could shift. A correction was widely expected, so investors were somewhat prepared, but if the downturn deepens, particularly for do-it-yourself investors, redemptions could see a pick up, Sharma added.

Also read | Will foreign investors return to Indian markets in 2025?

For now, the market remains on edge, with investors weighing whether to cut losses or stay the course. While history suggests that India’s bear markets don’t last long, a prolonged downturn—combined with weak corporate earnings and global headwinds—could test that resilience.

The real test now is whether investors will keep the faith or if redemptions will start snowballing into something much larger.